ACTIONS ARE NEEDED TO STRENGTHEN THE
NATIONAL QUALITY REVIEW SYSTEM FOR CORRESPONDENCE AUDITS

Issued on September 20, 2013

Highlights

Highlights of Report Number: †2013-30-099 to the Internal Revenue Service
Commissioner for the Small Business/Self-Employed Division.

IMPACT ON TAXPAYERS

An
audit is one of the primary enforcement tools the IRS uses to address
noncompliance with the tax laws.† Because problems with correspondence audits
are not always recognized and reported, the IRS may be missing opportunities to
reduce the noncompliance that contributes to the Tax Gap and promote tax system
fairness among the tax-paying public.

WHY TIGTA DID THE AUDIT

This audit was initiated to determine the
accuracy of the results from the National Quality Review System (NQRS) and how
management uses the feedback to enhance the quality of correspondence audits.†
The review is part of our Fiscal Year 2013 Annual Audit Plan and addresses the
major management challenge of Tax Compliance Initiatives.

WHAT TIGTA FOUND

The
NQRS is designed to provide IRS managers at all levels with estimates of audit
quality from a sample of audits to use in identifying areas in which corrective
actions are needed.† However, TIGTA identified areas that could be strengthened
to increase the accuracy of NQRS review results, enhance the ability of
managers to identify and address quality problems with correspondence audits,
and ensure that the NQRS sample is selected at random.

The
auditing standards and NQRS quality measures need to be better aligned.† The
auditing standards, including the consideration given to significant issues,
contain key requirements not evaluated under the NQRS.† This can create inconsistencies
in how examiners conduct audits and in how the NQRS evaluates the quality of
those audits to identify errors.

For
example, TIGTA evaluated a statistical sample of 127 of 2,913 correspondence
audits that had been reviewed by the NQRS during an 18‑month period and
found errors with penalty determinations in 65 of the audits (51 percent) that
had not been detected and reported by NQRS quality reviewers.

IRS
executives and stakeholders should be provided with a more comprehensive
snapshot of audit quality so that needed corrective actions can be timely
recognized and taken.† Only one overall measure of audit quality is currently
reported quarterly by the NQRS to IRS executives and other key stakeholders
even though as many as 71 items are reviewed.

Finally,
the random selection of audits for NQRS review could not be verified.† As such,
TIGTA was not able to confirm the statistical validity of the NQRS results.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the IRS ensure that
1) the auditing standards align with the NQRS quality measures, 2) a more
complete picture of correspondence audit quality is provided to NQRS customers
on a regular basis, and 3) audits are selected randomly for NQRS review.

In
their response to the report, IRS management agreed with the first two
recommendations and plans to take corrective action.† IRS management disagreed
with the third recommendation, indicating that they do not have a cost-effective
way to allow the randomness of the NQRS case selection process to be verified. †Because
the IRSís conclusion was reached after the draft report was issued, the
underlying details supporting the conclusion were not evaluated.† If the sample
selection process cannot be verified, the IRS cannot be assured of the
statistical validity of NQRS results.

READ THE FULL REPORT

To view the report, including the scope, methodology,
and full IRS response, go to: